Residuals, The Icing On The Cake

This article is intended for those note brokers who primarily work with groups of private investors and do not broker their notes to the large institutional buyers. However, after reading this, those of you who only broker notes to institutions might be encouraged to work with private investors. Nevertheless, you may need a real estate license in your state to do so.

It's Monday morning and the mailman delivers your mail. You open one of the envelopes from the XYZ Note Collection Company. Inside is a check for $83.33 on a deal you did last month. The transaction was either a new loan that your investors funded or a discounted, existing note that they purchased. Let's say the transaction yielded 9.75% and the investors to whom you sold the investment were willing to accept a yield of 8.75%. Therefore, the 1% difference is paid to you on a monthly basis for the remaining term of the loan. This means, in addition to your regular commission, you'll receive $83.33 for 60 months, for a total of $5,000! 

Frankly, this wasn't my idea. Tom Standen of Note Servicing Center (209-966-3445) told me about it and I presume somebody passed it onto him. When Tom initially suggested that I get a "residual", I scoffed at the concept because I felt I wasn't being fair to my investors. However, after some soul searching, I realized it is a "win-win" situation since my investors are more than happy to receive returns of 8.5% to 9%. Hence, any interest above what my investors are willing to accept could be paid to me on a monthly basis, i.e. the "residual".

This is how the idea works for Dick Ballard, Inc, Mortgage and Investment Brokers and how it can work for you. We entered into the mortgage and discounted note business approximately 18 years ago and have only dealt with private investors. Some of these investors came to us from my prior commercial real estate brokerage business. Our business has grown to where we now have around 75 investors who are able to invest anywhere from $50,000 up to $150,000, or more. The mortgages that we fund, or the existing notes we purchase, range anywhere from $75,000 to $1,000,000.

Usually several investor, up to ten, go into each investment as tenants in common. If there are more than ten investors, we form a Limited Liability Company. We follow these rules because the California Department of Real Estate licenses us. Each investor signs a Note Owners Agreement, as well as the Special Power of Attorney, which allows me to administer the investment during the term of the loan. The rules are similar if we form a LLC. The investors agree to pay me the "Residual" fee that is called an Administration Fee in the Note Owners Agreement.

Since I started collecting "residuals" approximately two years ago, my monthly income has increased to approximately $700 and is growing monthly - the icing on the cake! I should point out that over the past 18 years not one of our investors has lost one dollar investing with us.

"Reprinted and used with Permission of Author - 12-2005"